Sheila Bair: U.S. Banking System Still Fragile

9/10/2013 7:00PM

In this special Crisis Plus 5 series of The Big Interview, former FDIC Chair Sheila Bair reflects on the five-year anniversary of the 2008 financial collapse, telling WSJ's David Wessel the banking system in the U.S. remains fragile but that regulators succeeded in enforcing higher capital requirements for big banks.

This transcript has been automatically generated and may not be 100% accurate.

I ... I ... the the the ... I ... David Wessel Wall Street Journal joined today by Sheila Bair ... Senior Adviser ... Pew charitable trusts ... were sitting ... we're here because you are the chairman of the Federal Deposit Insurance Corporation during ... one of the worst moments in our economic history ... I think as we look back and anniversaries one question people have is ... have we done enough to make a safe ... have we done enough to reduce our vulnerability is going to go through something like this again ... no I don't think we can now we have done some things ... that have been helpful in March and I think her system is still some crash all morning ... so what things you think we have done what would be in humans ... well we have said that more capital and the pink sun enough there's still too high ... risk OB ticket Macau on the banks due to stress testing process the starter during the crisis ... um we've ... implemented rules for the resolution Teresa Dodd Frank in the coming of the tools to have an orderly bankruptcy process for that large financial institutions ... is more work needs to be down there but the rules are in place the powers that there and available for use ... I didn't take a pic here again for the outgoing chairman of the CFTC deserves a lot of credit usually have driven through ... most the rules to get to those of the offer has trimmed its trade with the standard ... products onto central clearing eventually some trading ... if it's a very positive thing ... the bureau has implemented a mortgage lending standards that we didn't happen and is based in Britain scanner so those are all positive things but ... I can give us the things we have an amateur Howlin on her ... but some typos when your capital I mean yes rules are still too complicated that things are still two AP few takeout this risk with nonsense which will lead to reduce the size of banks as their assets are ... not to risk you can bird and pork and higher capital requirements are still highly leveraged four five percent ... capital ... I'd to the total on risk weighted assets in the group that I had the city should be least eight percent ... higher and the related got six at the big improvement would bring about nine billion dollars for capital and ... but it needs to be more ... I think a securitization before we really haven't done anything Thanksgiving station was a big driver of the deadline and that we saw them or their services at a ... high after the ... decree of mortgages mortgages yet to pick Lily of mortgage as ... it looks like losing the political will to do the kind of meaningful reform of securitization and that's the porch ... many market reform money market blew up during the crisis had hit a taxpayer bailout ... and and really anything except ... work around the edges the Volcker rule today on ... speculation via institutions in the safety net ... Iberia poured will use to be finalized and still couldn't get the oh so ... last December that with you mentioned that the FDIC has now has more power to ... wind down of the institution gets in trouble ... so ... you hear often that ... we don't we haven't done enough to cure the two big ... problem I think we've actually done more than the public well I think we get to more than the public believes that I think it extremely helpful if the Fed and the FDIC were both more definitive as saying it's over ... Barbie where you can invest these big guys you can take losses if they feel we have an orderly process which we didn't have a prior to the crisis ... she resold them without hurting the rest of the economy and that's what we're going into limited ... losses on the creditors that the failing ... those tools are there I think is a viable strategy it uses the need to ... get that they could be very helpful feedback on a public commitment was was made in him we don't hear hear some hedging which I think it is unfortunate ... one ... additional thing to do what they're there to settle things she needs to do to dress too big to fail one is to get the cow requirement that ... get much bigger cushions that capital that will reduce the probability that people fail to begin with ... then if they get the ok some of us does something stupid and so you have to assume that you know there will be fierce in the future ... make sure they have enough long-term unsecured debt at the top of the House of the holding company level ... which would be available for loss absorption of the juvenile see don't have to put a broader assessment on the industry which is which is that with the mechanism now done right ... and and also again next reduce the prior probability of failure ... Getty Images connect to the long term care reform and get them to reduce reliance on short-term funding we get liquidity years we have solvency failures that liquidity is generally lead solvency years ... in your risk of illiquidity failure is greatly exaggerated ... if they relied constantly on short-term debt that the keeper with no such when the preventive thing ... that that that that they're in part because they will also increase banks' funding costs which will create pressure for them to downsize ... so there's that he added ... when you look over what happened five years ago there were lots of decisions made along the way some of them ... in moments of great strain in the system some of which you ... influence of which you tried to get them to move into a correction ... I was looking back and trying to think about ... about some of them in the one that really stuck me an enemy of thought about this is ... housing ... and when you look at ... the housing which was one of the drivers the crisis new look of the number of people who were affected ... but the worst of the one in every for ... mortgage holders is underwater ... when ... you think we could've done differently so the weekend a better place and housing ... what we need a mortgage lending standards said prior to the crisis I think every day and resident at Denver Nanking to his credit given to those who cite the Fed has the authority they didn't do that ... we do know that there is no consumer bureau in a mining center so that was helpful but that wasn't enough to counter this cute ... economic incentive for three positions created one three separated the ownership of the mortgage and with that favors the ... rich would fall once we were separated at interest ... the decision to originate on and on the line ... we started tearing problems that because ... people who are vision and loans are paid up front in an area said I should have been generated by and ... what about them during the crisis were the things we could've done during the crisis and immediately afterwards that it would have spent the healing of the housing market yes I think so I think we wanted a much more aggressive loan modification program and actually our market we had two proposals one was a difference will pay them for a woman can get that with with that ... with an insurance program against read the polls that if the ... server sure is that investors agreed to modify mortgages ... I you know at John Cain I had a very aggressive program of them are standing to help develop and when the setup Goldcorp with depression actually buy these bonds ... we try to do some which it is a bit of a different tack to try to approach that I was somewhat of a different angle the same idea into thousandnine was something called public art and ... other private partnerships ... basically this center facilities that would be a ... supporter but by the government and private sector bidders ... to get the intent of regulators forced the banks issue there been assets ... in this facility where they can be restructured ... that is gonna be for all assets to its mortgages ... and again because it is only for the banks that is to be always on the balance sheet of the debt could tell that this was restructured to ... see I think there were were ... much more muscular as steps we could have taken ... yes they would have cost money ... I yes they would of been difficult to implement but not impossible ... but I think that the decision was made it was just too hard yes we worked it around the edges and didn't really get to where the problem is that their mortgages ... when you look back over the five years ... what stands out is the ... biggest mistake and to his success ... oh ... the miner to get Mr. however have ... been ... well I taken the lead up to the crisis there were there are three things I we we should not about which we did one was that mortgage lending standards ... they have ... mortgage lending standards ... oh we should not be regulated ... derivatives that wish it ... were just the wrong thing to jail ... and ... then I think ... I the capital standards that were ... going at weaker and weaker ... we were fighting the battle in two thousandsix or the regulators who in the big banks become more leverage ... I it's it's one of them and we had this huge ... really have is markedly in on the mortgage lending standards to those of the mistakes we made ... so ... during the crisis ... I think that ... there have been more consistency we should actively would've ... should've worked better as a team of Bear Stearns and got the ball rolling ... while we were completely left out of data to consider an expectation for bailouts that confuse the market leader when Lehman Brothers went down in different approaches and fears ... I'll we didn't really have ... across the someplace we didn't have legal or so and in some of that which is unavoidable people coming in to make that decision along but in retrospect I think the market was confused ... and we try to come up with a more consistent strategy ... I doubt that might've helped and I think the bailouts which a generous look we knew something I never said we didn't ... do anything but ... taking everybody added hundred cents on the dollar creditors yes I think you know one of things we did this take your cheaper for me it initially proposed only guaranteed Nissan's ... the AIG counterparties but couldn't take at least ten cents on the dollar think ... that were the least because the market discipline ... and am only getting to see that sometime this system is highly stable ... we got capital into the banks that was good the stress test cricket getting a cap on the banks with good that we get to clean up the balance sheet the analysis program ... to force them to sell the assets but we never followed through with it and I think that was mistaken us one one reason why the economy ... I do think you look really good crop of very large institutions they have a lot of sae be adding assets on their books she are they spend a lot of time nursing their bed and says to make some concern that it makes one cautious ... even now I he's he's the smaller banks in home lending in larger institutions ... the abilities they issues to work through ... and there are other reasons were to say that criticized the capital rules that distance and the landing where the Securities and reduced reading and math again a nice to be fit enough ... if you if you can take your medicine or liver but the BNP get the doughnut chain's cleaned up ... the of institutions that you can go into the economy get much better job of planning ... a surprise to her Sinhalese pens it's doing with all this litigation legacy issues of the gifts that you know it's a drag on the economy ... would expand that absolutely